Jakarta, CNBC Indonesia – Bank Indonesia (BI) and the People’s Bank of China (PBoC) recently extended the agreement To deceive bilaterally in local currency (Bilateral Currency Swap Agreement/BCSA). With this agreement, the use of the US dollar will be reduced and BI will be better prepared for the turmoil that could result from the normalization of the Fed’s (US Federal Reserve) monetary policy.
“The BCSA agreement allows for exchanges in each country’s local currency of up to CNY 250 billion or 550 trillion rupees (equivalent to approximately $38.8 billion),” BI wrote in an official statement released on Thursday (01/27).
The agreement has been in effect since January 21st.
“This cooperation agreement aims to further promote bilateral trade and direct investment in each country’s local currency in the context of economic development in both countries and demonstrate the commitment of the two central banks to safeguard financial market stability,” BI wrote.
Besides China, BI said it also conducts financial cooperation with other central banks in several countries in the region.
The BI-PBoC Cooperation Agreement has been signed by BI-PBoC since March 2009 and has seen several amendments and extensions, including this month just before the Fed announced it would aggressively raise interest rates this year.
The Fed indicated earlier this morning that it will hike rates in the near future, most likely in March.
“With inflation well above 2% and a strong labor market, the committee (the Federal Open Market Committee (FOMC)) expects to raise the target range for the Federal Funds Rate (FFR) further soon,” the Fed said in a statement.
Since the coronavirus disease (Covid-19) pandemic, the Fed has cut interest rates to 0% – 0.25%. With this announcement, the market is increasingly convinced that the FFR will be raised by 25 basis points to 0.25-0.5% in March.
Not only that, but the Fed is expected to hike interest rates more than three times this year, judging by Fed Chair Jerome Powell’s statement that inflation could still rise.
“Inflationary risk is still rising, both from the FOMC perspective and from my personal perspective. There is a fairly large risk that the inflation we are currently experiencing will last for a long time. There is also a risk that inflation will continue to rise. We need to be in a position where monetary policy can overcome any existing possibilities,” Powell said at a press conference following the monetary policy announcement, as reported by CNBC International.
Renowned investment bank Goldman Sachs has forecast that Jerome Powell will raise interest rates four times this year and has not ruled out another hike given high inflation in the United States.
In addition to raising interest rates, the Fed confirmed that it would devalue the balance sheet (balance sheet) this year.
In a statement this morning, the Fed said a balance sheet reduction could be made after interest rates were raised and it would be done “in a predictable manner”.
The Fed chairman also confirmed that he would reduce the value of his balance sheet, but did not say when. The amount of the balance sheet value is reduced by the Fed, which means that the bonds held are released in order to absorb liquidity again.
“The balance sheet is much larger than it should be. There needs to be a significant reduction and that will take time. We want the process to be orderly and predictable,” Powell said.
Meanwhile, Goldman Sachs previously predicted that the Fed would reduce its current balance sheet of nearly $9 trillion by $100 billion a month. The cuts are expected to start in July and last for two to two and a half years, taking the Fed’s balance sheet to between $6.1 trillion and $6.6 trillion.
The aggressiveness of the Fed can certainly affect the strengthening of the US dollar and put pressure on the rupiah. The BCSA agreement at least reduces the need for US dollars, which can relieve the rupiah.
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